Home Equity Line of Credit — Use to Pay Off Your Mortgage

One Year Exam­ple of how to use your

Home Equity Line of Credit

to pay off your mortgage.

Ask for a free analy­sis of your finances here.

The way mort­gage inter­est is cal­cu­lated ver­sus the way a home equity line of credit inter­est is cal­cu­lated is a major rea­son why one can actu­ally use a home equity line of credit to pay off a mort­gage much faster while can­celling boat loads of inter­est charges as well.

Below is a list of 5 dif­fer­ences in the make up of these two home loans. MMA-5-differences-heloc-mortg

These dif­fer­ences are exactly the rea­son why you can bor­row from your Home Equity Line of Credit to actu­ally pay off your mort­gage, sav­ing a lot of inter­est.

It is a mat­ter of mov­ing the right amount of money, into the right account, at the right time, for the right amount of time. It is a game that can be played eas­ily if you have the soft­ware to guide you on what to do and when to do it.

Below is a series of slides depict­ing 12 months worth of mort­gage pay­ments with 4 pre-payments bor­rowed from their Home Equity Line of Credit which is being charged an inter­est rate of 10%. The repay­ments only require inter­est and no prin­ci­pal too, by the way. Other types of lines of credit can also be used, besides a HELOC..

Let us first look over their amor­tized loan sched­ule so we can notice how much money is being paid in inter­est to the lender out of each months sched­uled pay­ment. Notice in month 1, $1,000 is paid to the bank and $199.10 is applied towards pay­ing down the bor­rowed $200,000.

Month 2 shows us that $1 more is added to the amount of prin­ci­pal being paid off. After one year the ‘prin­ci­pal jump’ is less than $12.

amortized _wout_logo

If you google amor­tized mort­gage cal­cu­la­tor and enter in your mort­gage infor­ma­tion you will see how mort­gage inter­est is front loaded because lenders know that the national aver­age for a per­son to either sell or refi­nance their home and there­fore stay in their cur­rent mort­gage con­tract is 5.65 years. This means dur­ing the first 5 to 7 years of a mort­gage, the inter­est rate you are pay­ing for the mort­gage is more like 80%. My last blog shows an aver­age daily bal­ance spread­sheet. Because HELOC’s inter­est is cal­cu­lated using an aver­age daily bal­ance we can use these dif­fer­ences between  amor­tized and aver­age daily  bal­ance inter­est cal­cu­la­tions to our advantage.

amortized_5yrsWe are assum­ing that this exam­ple cou­ple has an income of $5,000.00 each month with $4,000.00 worth of expenses. This means they have $1,000 left over each month, that is avail­able to them due to a vari­ety of pos­si­ble rea­sons; one pos­si­bly being they used their home equity line of credit to pay off car, stu­dent loans or credit card debts which freed up that $1,000.00. Or, another rea­son could be that they were pay­ing more than the min­i­mum bal­ance required on their debts and so now they are allow­ing our soft­ware pro­gram to guide them where best to place those addi­tional funds.

You will also notice that the $5,000.00 monthly pay cheque is being deposited into the heloc.

Why would you want to do that?

Because the inter­est is cal­cu­lated on an aver­age daily bal­ance, there­fore, the more money you deposit into the heloc and leave it there for the longest amount of time, the less inter­est you will be charged each month.

We are also assum­ing that this cou­ple is pur­chas­ing a soft­ware pro­gram designed to guide them out of debt in the quick­est way pos­si­ble and that they paid $3,500 for that soft­ware which is why the HELOC is begin­ning with a bal­ance of $3,500.00.

The oval on the left shows the amount of interest-only HELOC charges for each month.

MMA-Month-1-2

Notice the $20.83 + $12.50 + $34.80 = $68.13 of home equity line of credit, inter­est only, aver­age daily bal­ance, charges over three months.

Also notice that by bor­row­ing $3,675.77 from the home equity line of credit and using those funds to make a prin­ci­pal only pay­ment to one’s mort­gage, this fam­ily knocked off the back end of their mort­gage $17,249 of inter­est charges plus 21 months of monthly sched­uled mort­gage payments.

Because they have moved for­ward in the amor­ti­za­tion sched­ule of their mort­gage, they are now receiv­ing an increase of $19.38 more from next month’s pay­ment (month 4) towards the build­ing of equity or pay­ing off their debt.

MMA-month-3

.

We can again see how this cou­ple was charged first $26.46 in month 4 and then $18.13 in month 5 as inter­est charges on the aver­age daily bal­ance of their HELOC.

They are still deposit­ing their income into their HELOC and pay­ing monthly expenses from their HELOC. I will explain fur­ther how this is pos­si­ble when you con­tact me.

MMA-month-4-5

.

MMA-month-6

.

MMA-Month-7-8

MMA-month-9

MMA-months-10-11Click Month 12 image for clarity

So for a cost of $297.89 of inter­est only charges on the money they bor­rowed from their 10% HELOC this fam­ily erased $50,862 of inter­est charges along with 53 months of monthly mort­gage pay­ments over one year. And they have jumped for­ward on their amor­ti­za­tion sched­ule nearly 5 years and so are receiv­ing $75.94 more towards pay­ing off their prin­ci­pal instead of just 12 dol­lars in just one year.

Keep work­ing this sys­tem  till your mort­gage and your HELOC is paid off and you could save a sub­stan­tial amount of inter­est. For the remain­der of the years that you would have been pay­ing your mort­gage now instead, you can use the extra monthly income for cre­at­ing an awe­some future. Go to Finan­cial Nav­i­ga­tion Solu­tion to learn about a soft­ware sys­tem that actu­ally guides you on the fastest way to pay off your debts with lit­tle to no change in your bud­get or lifestyle.

I must point out though that there is now a sys­tem that allows you to use the same money you are pay­ing your debts off with to also build wealth, cre­ate a retire­ment fund and also build a legacy, all at the same time. My next blog post will give more details on this sys­tem. Or apply now for your free illus­tra­tion to see how to make the most of your hard earned money.

MMA-correct-30yrs

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September 4, 2009 · Jennifer · 9 Comments
Tags: , , , , ,  · Posted in: DEBT ELIMINATION, Home Equity Line of Credit

9 Responses

  1. markez linda - December 6, 2009

    I enjoyed this inter­est­ing topic and look for­ward to see­ing more!
    we all know it is not easy as pie.

    regards

    Drew

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